Suntech Power Holdings Co. Ltd (NYSE: ADR STP) is the one company that's best-equipped to withstand the biggest challenge facing the solar cell industry – falling prices and squeezed margins.

Make no mistake: The solar sector has suffered of late.

Several stocks have shed as much as 20%, as a result of margin concerns and a drop-off in generous European government subsidies.

And Suntech has been no exception. It's fallen nearly 25% since April 1.

But China-based Suntech Power has advantages its rivals do not – and that makes it more of a bargain than a flop.

Surprisingly, that advantage is not low labor costs, which accounts for less than 4% of the cost of building solar cells, but rather technical advances in manufacturing.

For years Suntech has scouted out research, such as a two-decade-old project at Australia's University of New South Wales, which it has adapted to enhance its manufacturing process. Those efforts have increased efficiency and beefed up performance of the solar cells themselves.

One such process cut solar panel costs by 10% to 20%; another increased manufacturing efficiency by 10%.

Increasing the efficiency of the product matters because solar is still significantly more expensive than fossil fuels – it costs about $0.22 and $0.33 per kilowatt-hour, compared to the U.S. average cost of $0.11 per kilowatt-hour.

As the prices of solar cells have fallen over the past year, the pressure has been on manufacturers to get more efficient to salvage profit margins. Analysts anticipate this pressure will continue at least into 2012, which should give Suntech – seemingly on a perpetual quest for better ways to build its products – an edge.

Suntech's technology also has paid off in helping to create best-in-class products. The company's new HiPerforma cells can produce 7% to 9% more power than similar panels from other manufacturers.

That ability to attract more business to add to its volume – Suntech became the world's top seller of solar panels in 2010 – also will help the company cope with tighter margins.

Lose Some, Win Some

Apart from shrinking margins, investors have worried about how a reduction in government subsidies from cash-strapped Europe will affect the solar sector.

Suntech derived 66% of its revenue last year from Europe, with only 15% coming from the United States and 5.3% from China.

But while demand in Europe is on the decline, demand elsewhere is on the rise, and Suntech should be first in line for much of that business.

Suntech Chief Executive Officer Shi Zhengrong told Bloomberg News that he expected solar power to become the primary source of renewable energy in China over the next decade. Suntech also expects growth in the United States; last November it opened a manufacturing plant in Goodyear, AZ, capable of building 50 megawatts (MW) of solar panels annually.

"More and more governments will initiate policy to support solar," Shi predicted, saying he expects $60 billion to be invested in solar power over the next decade.

According to stock-analysis firm Trefis, China plans to generate at least 15% of its total power from renewable sources by 2020, with much of that likely to come from solar. As a Chinese company, Suntech should be able to win a sizable chunk of this business.

Although some U.S. subsidies may expire later this year, private investors recently have begun to show interest in funding some projects. But a few states have taken matters into their own hands; California, for example, has set a mandate that renewable energy must comprise at least one-third of its electricity generation by 2020.

Suntech itself has even launched financing initiatives for residential, commercial and utility projects in the United States in an effort to open up the market.

Land of the Rising Sun

And then there's Japan. In the wake of the Fukushima nuclear disaster, Japan is taking a much harder look at renewable energy in general and solar in particular. Prime Minister Naoto Kan said in May that he would like to see solar panels on 10 million roofs by 2030.

Such a widespread deployment if solar cells would create a $261 billion market, with some calling for the same type of subsidies that fueled the solar market in Germany.

"We can win once the feed-in-tariff starts," Yutaka Yamamoto, president of Suntech's Japan unit, told Reuters. Suntech believes it can double its Japanese market share to 10% by 2012.

Given these advantages, Trefis believes Suntech's stock has significant upside potential – by as much as 40%. Its target price is $10.64, while Suntech closed Thursday at $7.46.

If Suntech Power Holdings continues to excel at innovation, making more efficient products that will cost less, it should emerge as one of the solar industry's biggest winners.

"It's simple yet effective," Suntech CTO Wenham told Technology Review in describing of one of his latest innovations. "That simplicity keeps down production costs, while the higher efficiency will allow cells to generate more power, lowering their cost per watt. If the company is successful, advances in manufacturing will once again make solar power cheaper."

Where do you get the 11 cent average cost figure? I see retail prices under 10 cents and cost prices around 5 cents. My utility sells surplus freshet power at 1 cent ($10/MWH). Hydro One in Ontario Canada pays $.023/KWH to dispose of surplus wind and solar energy.

Active solar energy is good, and competitive over the intermediate term; but, passive solar energy
leverages 20 to 50% energy savings compared to historic building practices. Back in the late 1970's
many forms of passive solar housing were developed that produced heat savings in that range.
Unfortunately, Reagan politically killed the solar energy movement, and the passive solar energy
movement also declined in favor of conventional building culture. We should have kept the
renegade passive solar housing movement going, because it cost relatively little for the long
term energy savings, and greatly reduced the size of investment in active systems to be used
to supplement the energy system, if desired.

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